Redefining Liquidity for Monetary Policy

Kyunghun Kim (), Il Houng Lee () and Won Shim ()
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Kyunghun Kim: Korea Institute for International Economic Policy
Il Houng Lee: Bank of Korea
Won Shim: Bank of Korea

No 18-1, Staff Papers from Korea Institute for International Economic Policy

Abstract: This paper proposes a monetary aggregate “Liquidity” that could serve as a useful indicator for gauging the appropriateness of monetary policy. If liquidity rises above a certain threshold, it is signaling that monetary policy is losing traction due to structural and other impediments even when the inflation gap remains open. This indicator supplements the financial cycle approach but adds value by providing a benchmark that is derived from the national account, and not based on its own trend. Over the last two decades, each time this measure rose above the threshold range, it was followed by a decline in GDP growth. The latter was greater when accompanied by a high physical asset value to GDP, e.g., an elevated property market.

Keywords: Liquidity; Monetary policy; Inflation targeting; Financial stability (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 G01 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2018-01-19
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ris:kiepsp:2018_001

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